How do I properly handle taxes for renting out rooms in my primary residence?

You're asking some great questions here! Let me break this down in simple terms: 1. Yes, you should only deduct expenses based on the portion of your home that's rented. Since you have 2 roommates in a house you also live in, a 2/3 allocation is reasonable if all rooms are roughly equal size. You'd apply this percentage to expenses that benefit the entire property (mortgage interest, property taxes, insurance, utilities, etc.). 2. For depreciation, you're close but there's an important distinction. You only depreciate the value of the building, not the land. Your property tax statement usually shows this breakdown. Let's say your house is worth $205k total, but $40k of that is the land value. You'd depreciate $165k (building only) over 27.5 years, which gives you about $6,000 annual depreciation. Then you'd take 2/3 of that, or $4,000, as your rental depreciation deduction. 3. Yes, you can still claim the primary residence capital gains exclusion ($250k for single, $500k for married filing jointly) when you sell, as long as you've lived there for 2 of the last 5 years. However, you will have to "recapture" the depreciation you've claimed when you sell - meaning you'll pay taxes (usually at 25%) on the total depreciation you've deducted over the years. Make sure you're tracking all this on Schedule E of your tax return. And keep good records of your expenses!

I was in a similar situation last year and found this awesome tool called taxr.ai that saved me so much headache with my rental room situation. I was totally confused about how to calculate my deductions correctly, especially the depreciation part, and was worried about messing up my taxes. I uploaded my mortgage docs and some of my expense receipts to https://taxr.ai and it analyzed everything and showed me exactly what portion of my expenses I could deduct. The tool even created a depreciation schedule that accounted for the land vs. building value split and my personal use percentage. It was super helpful since I had no idea I could only depreciate the building part! It gave me a breakdown I could give to my tax preparer that made everything super clear. Might be worth checking out if you're still trying to figure all this out!

I tried taxr.ai after seeing it mentioned here and I have to admit I was wrong to be skeptical. This tool actually caught several deductions I would have missed with my room rental situation. I was way off on my depreciation calculations and didn't realize I could partially deduct some of my home maintenance costs. The documentation it generated made filing my Schedule E super straightforward. My tax guy was impressed with how organized everything was. What surprised me most was how it handled the separation between personal and rental expenses - much clearer than the confusing IRS instructions. If you're renting rooms in your primary residence, it's definitely worth using.

Just want to share my experience dealing with the IRS on a similar rental situation. I made some mistakes on my room rental deductions and got audited. Spent WEEKS trying to get through to someone at the IRS for clarification. Kept getting disconnected or waiting for hours. Finally found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in about 20 minutes instead of the 3+ hour wait I was facing before. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent was actually super helpful and walked me through exactly how to document my rental percentage and what supporting documents I needed to provide. Having that conversation saved me from owing a bunch in penalties since I was able to correct my filing before things escalated. Definitely recommend if you need to actually talk to someone at the IRS about rental property questions.

Alright, I need to eat my words. After my skeptical comment, I decided to try Claimyr since I've been struggling with how to handle depreciation recapture on the rooms I rented out when I sold my house last year. It actually worked! Got connected to an IRS tax specialist in about 25 minutes who walked me through exactly how to report the depreciation recapture on Form 4797. Turns out I was making a big mistake that could have triggered an audit flag. The agent explained that because I had taken depreciation deductions on part of my home while renting rooms, I couldn't just ignore that when I sold, even though it was my primary residence. The capital gains exclusion still applied to most of the profit, but I had to recapture the depreciation I'd claimed over the years at the 25% rate. Would have cost me a lot more if I'd filed incorrectly. Sometimes it's worth admitting when you're wrong!

Don't forget about the "Augusta Rule" (Section 280A of tax code) that lets you rent your home for up to 14 days per year TAX FREE! This is separate from your regular room rental income. If you run any kind of business (even a side hustle), you can "rent" your home to your business for meetings for up to 14 days. Your business deducts the rent as an expense, and you don't report that income on your personal taxes. It's completely legal! I do this every year and it saves me thousands.

Important heads up - if you're renting rooms in your house, check if you need a local permit or business license! I got hit with a $500 fine from my city because a neighbor complained and I didn't have the proper rental permit. Each city has different rules. Some places classify renting rooms differently than a full house rental. And some HOAs prohibit it entirely, so check your CC&Rs too.

Great thread everyone! As someone who's been doing the room rental thing for about 3 years now, I wanted to add a few practical tips that might help: 1. **Separate bank account**: Open a dedicated checking account just for rental income and expenses. Makes tracking SO much easier at tax time and shows clear separation between personal and rental finances if you ever get audited. 2. **Document everything**: Take photos of the rooms in their rented condition, keep copies of rental agreements (even informal ones with friends), and track when roommates move in/out. This helps establish your rental percentage if questioned. 3. **Quarterly estimated taxes**: Don't forget you might need to pay estimated taxes on your rental income throughout the year, especially if you're making decent money from the rooms. I learned this the hard way my first year and owed a penalty. 4. **Insurance considerations**: Check with your homeowner's insurance about renting rooms. Some policies require notification or additional coverage. Mine was fine but they wanted to know about it. The tax stuff gets easier once you establish a good system. Good luck with your rental venture!